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Sunday, Nov. 2, 2008

Stopping the Meltdown

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Who is responsible for the current economic meltdown? The answer is, without equivocation, the U.S. government. It is not that the government set up programs that helped poorer people buy houses beyond their means; it is that the government closed its eyes and let the unfettered free market do as it pleased. The people who hate government got into power and pushed this "government can do nothing positive" philosophy and systematically removed many of the regulations that have existed for 75 years as a result of the Great Depression.

It took this major economic collapse to hear former Federal Reserve Chairman Alan Greenspan say that he "found a flaw" in his thinking. Well, any economist who studied the Great Depression learned that the unregulated free market will result in business cycles that when accompanied by other factors-a major drought or the creation of an oil cartel- can spiral downward toward a 1930sstyle depression. We learned two important things from the depression of the '30s. One, that governments have the knowledge and tools to manage the economy and prevent a normal downturn from becoming a major depression. Two, that governments can and should impose carefully crafted, robust market regulations that do not discourage entrepreneurial energies while enabling the most efficient firms to prosper.

So now that those in power dropped the ball with their ideologically nave, Ayn Rand-influenced, anti-government philosophies, pragmatic economists must now set up mechanisms-or dust off some of the old mechanisms that had worked in the past but were discarded by the free market ideologues- to save the economy. The knowledge to right the economy is there; the only question is whether the will to re-regulate is also there.

Right now we are in a bind and it is going to cost money, a lot of money, no matter what we do. If we stick to this nave, anti-government philosophy, we will go into a very severe recession and possibly a depression. Many people will lose their jobs, and many businesses will go under. This will create much human misery and cost the taxpayers a fortune in such areas as assistance to those out of work, increased crime, and lost personal and business tax revenues. Or it will cost a fortune, probably a much smaller fortune, to make strategic investments in banks and other institutions and re-regulate the economy. With the latter approach, there is the hope of getting the taxpayers' money back, perhaps with a profit, and avoiding the miseries of massive unemployment and failed businesses that the other approach would create.

Fortunately, it appears that we are choosing the invest-and-re-regulate approach. It is interesting to hear staunch economic conservatives like Steve Forbes faintly supporting the government buying equity interests in U.S. banks. In the old days it would have been viciously attacked as socialism.

Fortis formerly taught economics at Smith College.

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